FSC Chairman Kim Seok-dong

Loose regulation triggers savings bank fiasco

By Kim Tae-jong

Financial authorities suspended the business operations of four savings banks Sunday, citing their poor financial soundness, in a third and last effort to revamp the troubled secondary banking sector.

The decision for the suspension was a critical measure to stop the savings banks collapsing, but many people are now raising a fundamental question ― why didn’t financial regulators take preventive action before they entered the terminal stage?

The four banks ― Solomon, Mirae, Korea and Hanju ― were slapped with six-month business suspensions. This means the

FSS Governor Kwon Hyouk-se

Financial Supervisory Service (FSS) and the Financial Services Commission (FSC) have now shut down a total of 20 banks.

They said prevalent irregularities at savings banks such as the issuing of illegal loans and corrupt management led to insolvencies, adding these were the root causes of the suspensions.

But experts and market insiders argue that the financial regulator’s neglect of its duty to supervise financial firms properly put them in a terminal stage.

“What’s happening now is utter nonsense,” said Young Soo-gil, chairman of the Presidential Committee on Green Growth. “The disastrous situation of savings banks is the result of the regulator’s laid-back approach to its duty.”

Young, who also served as president at the National Strategy Institute, criticized officials at the financial regulators, saying they lacked the will to actively solve fundamental problems and only wanted to stay out of trouble during their term.

“They have ambitiously pledged to develop Korea into a financial hub in East Asia, but it’s just an empty slogan if they are not faithful to their basic jobs,” he said.

Market insiders also claim that the problems with the savings banks had been foreseeable since small-scale mutual credit funds were licensed as “savings banks” in the name of diversifying the financial sector while regulation remained loose.

As a result, savings banks have long focused on large loans through high-risk “project financing” in the construction market to pay high interest rates for depositors lured in by them.

Kim Dae-ik, analyst at Hana Financial Research Institute, also said a lot of shareholders at savings banks took advantage of loopholes in the regulations.

“Savings banks have become a safe source for their major shareholders,” Kim said, implying that shareholders were allowed to get loans whenever they wanted as if they were accessing their own money without worrying about repayment. “But the financial regulators did not stop such corrupt practices, which put the savings banks in their current shaky condition.”

‘Moral hazard’

Now, the prosecution is also investigating the executives of the four savings banks to see whether they were involved in other irregularities such as embezzlement and breach of duty. They raided the headquarters of four savings banks and houses of their executives Monday.

Prosecutors now believe that the executives created massive slush funds, a large part of which were used to bribe politicians and officials at the FSS to avoid crackdowns or administrative measures.

For example, Kim Chan-kyung, chairman of Mirae Savings Bank, who was caught trying to sneak out of the country late Thursday, allegedly embezzled about 300 billion won from corporate funds.

It also turned out that Mirae raised the salary of executives by 30 percent in the 2010 fiscal year although the firm posted a deficit of about 260 billion won.

Last month, Solomon Savings Bank repaid the debts of its employees who took out loans worth 3.7 billion won from their own bank when repurchasing treasury stocks. It was seen as a move to split the firm’s assets before it went bankrupt although investors will inevitably be hard hit by the firm’s liquidation.

Cho Nam-hee, secretary-general of the Korea Finance Consumer Federation, said the regulators should take responsibility and face due legal penalties for neglecting their duties as they contributed to the current crisis along with the corrupt practices at the savings banks.

“They simply did not do their jobs properly,” he said. “And now they blame the corrupt management of the savings banks. But what they don’t see or don’t want to see is their role in making the situation worse.”

He insisted that officials at the FSS should also be subject to legal punishment if they are found to have neglected their duties.